The U.S. sports betting market is proving to be a costly and potentially unsustainable vertical for many gambling companies. And the burdens are coming from all directions.
First, operators must deal with the unavoidable lobbying, compliance, market access, and infrastructure costs that are byproducts of the fractured (50-state) U.S. market. Then there are the licensing and taxation burdens, the pains of which vary from state to state.
And finally, there is the competitive landscape, which has some operators taking a Brewster’s Millions approach to U.S. sports betting.
Investors Go from Hot to Cold
One of the main motivations to participate in this level of spending is the notion that the “spend now” approach allows companies to capture market share and become one of the operators left standing when the dust settles.
Wall Street initially accepted the “spend now” strategy, but the staggering numbers (with no end in sight) have investors growing increasingly concerned, evidenced by the sector’s declining stock prices.
| 12-Month High | Current (late-March 2022) | |
| DraftKings | $71 | $18 |
| Penn National | $136 | $41 |
| Bally’s | $73 | $30 |
| Wynn | $140 | $80 |
| Caesars | $120 | $76 |
Bottom line: Sports betting giveth and sports betting taketh away. But will it giveth again?
Hold the Line
Sports betting operators are asking investors for patience. Operators are vehement that promotional spending will drop considerably, leading to sports betting profitability.
Deutsche Bank analyst Carlo Santarelli sees it differently, calling the current numbers driven by promotional spending “phantom GGR.” As reported by CDC Gaming Reports, Santarelli is “highly confident” promotional spending will remain higher than operators suggest [DraftKings estimates it will dip to 22%]. Santarelli fails to see an off-ramp for promotional spending, but he also believes “gross revenue will be decidedly lower than expected.”
However, even if Santarelli is wrong, the strategy largely depends on the company’s ability to retain the customers they’re accruing, which becomes increasingly difficult in the rapidly evolving US online gambling landscape. A company with a well-received sports betting product will dominate the landscape in 2022, but that same product will likely need an equally good online casino product by 2025. Otherwise, a company is accumulating and storing customers for a competitor with a full suite of excellent products.
FanDuel’s CEO Peter Jackson made a similar point during a March 1 presentation to analysts, “Our customers are voting with their feet. They may take other competitors’ free money, but they come back to the FanDuel app.”
Today’s leading sports betting operators could face that same reality – their customers voting with their feet – down the road when legal online casino gambling is available in many locales.
The Unspoken Reason to Spend Wildly
Another reason to spend is deep-pocketed firms can make the market inhospitable. That will help keep competitors out of the market, thereby upping their chances of being among the eventual winners. At that point, they can potentially slash promotional spending, as customers will have fewer options to “vote with their feet.”
This mentality has led to monopolies and protectionist bills limiting market access from entrenched gaming interests. More simply put, it’s easier to win if there are few or zero competitors.
The approach seems to be working.
Given the current landscape, several companies once extremely bullish on the U.S. market are reassessing the supposed opportunity. One operator, Churchill Downs, has exited the market entirely, and several others have pulled back on the reins, including some of the biggest names in U.S. gambling.
Churchill Downs Throws in the Towel
The first casualty in the U.S. market was Churchill Downs. The horseracing giant seemed tailor-made to be a significant player in the American sports betting market, but it never gained traction with either of the brands it tried – BetAmerica and Twin Spires.
Instead of throwing good money after bad, Churchill has already decided to close its doors and leave sports betting to other gaming operators.
“This isn’t the result we wanted when we started this business back in late 2018, but it is the prudent next step for our company,” CEO Bill Carstanjen said during the company’s Q4 earnings call.
Carstanjen went on to use two terms that will feature prominently in the next few headers, short-term and long-term:
“The online sports betting and online casino space is highly competitive with an ever-increasing number of participants that the states have licensed. Many are pursuing maximum market share in every state with limited concern for short-term or even long-term profitability. Because we do not see—for us—a path in which this business model delivers predictable and acceptable margins for at least several years—if ever—we have decided to exit the B2C online sports betting and iGaming space over the next six months.”
Bally’s Delays its New York Entry
Bally’s was late to the US sports betting party but made up for lost time with a succession of moves and deals.
There was a name change from Twin River to Bally’s, a deal with Sinclair Broadcasting that saw the company rebrand its regional sports networks (RSNs) to Bally Sports, acquisitions of Bet.Works, Monkey Knife Fight, and most notably Gamesys.
Bally’s was also part of the winning bids for New York sports betting market access, but then a funny thing happened, the company suddenly seemed disinterested. Bally’s is still not active in New York, and Bally’s chairman Soohyung Kim called the current version of sports betting a good but not great business in a CNBC interview. Kim pointed to other operators taking a short-term approach, while Bally’s was interested in playing the long game.
Kim has since tried to acquire the company and take it private.
Wynn Puts Out the For Sale Sign and Leans on Affiliates
Then there is Wynn, which went from one of the most prominent marketers to putting its Wynn Interactive digital business up for sale, and announcing it too would be shifting to a long-term approach.
“In the fourth quarter of last year, we decided to retrench and build a business that creates long-term shareholder value and a long-term sustainable and profitable business,” Vincent Zahn, the SVP and treasurer of Wynn Resorts Limited, told Nevada regulators in early March 2022. “We cut back on media spending. We cut back on performance marketing. And we shifted the business model to more of an affiliate-based customer-acquisition model, given, in our opinion, the irrational cost of acquisitions metrics out there in the industry.”
Caesars Cuts Back on Marketing
Even Caesars, which dedicated $1 billion (that’s billion with a B) to advertising its sports betting product, including the national advertising campaign with JB Smoove, Halle Berry, Patton Oswalt, and the Mannings, has apparently had enough.
“We have accomplished what we set out to do. We set out to become a significant player, and it’s happened significantly quicker than we thought,” CEO Tom Reeg said on the Q4 earnings call. “I think most of you know me as someone who’s not one to spend any money needlessly.”
Upshot
We are still in the early stages of the U.S. regulated sports betting market, and there’s no end in sight to promotional spending.
Texas, California, and Florida have yet to launch, and other large-population states such as Ohio (legal but not live), Massachusetts and Missouri, if legalized there, will be hotly contested markets. That will put pressure on operators, many of whom will have to ask themselves (as Mick Jones did), should I stay or should I go?
